If you are looking to invest in Catabasis Pharmaceuticals Inc’s (NASDAQ:CATB), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Generally, an investor should consider two types of risk that impact the market value of CATB. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CATB, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.Check out our latest analysis for Catabasis Pharmaceuticals
An interpretation of CATB’s beta
Catabasis Pharmaceuticals’s five-year beta of 1.37 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, CATB can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does CATB’s size and industry impact its risk?
A market capitalisation of USD $40.92M puts CATB in the category of small-cap stocks, which tends to possess higher beta than larger companies. But, CATB’s industry, biotechnology, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of CATB, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests CATB should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How CATB’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine CATB’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, CATB doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect CATB to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what CATB’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of CATB’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into CATB.
Are you a potential investor? I recommend that you look into CATB’s fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. CATB may be a great investment during times of economic growth.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Catabasis Pharmaceuticals for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Catabasis Pharmaceuticals anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.